With a recent downturn in Cleveland business activity due to uncertainty in the economy and the upcoming presidential election, commercial real estate activity is expected to remain flat. And every market is being impacted, even those in strong industry sectors such as manufacturing, says Alex Valletto, associate, Cushman & Wakefield | CRESCO Real Estate.
“Uncertainty is creating a slowdown, and companies are having to make difficult decisions if they are considering renewing a lease or leasing or purchasing a new location,” says Valletto.
Smart Business spoke with Valletto about the current state of the regional commercial real estate market, and why your business may need to make a move now anyway, even if conditions are not ideal.
What is the current state of the regional commercial real estate market?
There is a lot of uncertainty. The market is expected to remain stagnant due to a lack of existing available inventory and a lack of new speculative construction starts, which continues to be a hurdle for local and regional tenants seeking to expand and backfill spaces. Businesses have less capital available, less money to put into the business and invest in equipment, people and other needs.
The market is flat, due to that uncertainty in the economic market and interest rates, especially regarding potential rate cuts. And even with potential rate cuts on the way, it’s not going back to where it was overnight. It’s likely to be three to five years before things change to a lower interest rate environment. In addition, leasing deals are trending longer, between five to 10 years, with annual rental rate increases averaging 3 to 4 percent, creating pressure on businesses looking to make a move.
The overall vacancy rate in the Cleveland market has decreased to 2.8 percent in Q2 2024, as the market recorded 1.1 million square feet (msf) of positive direct absorption, rebounding from negative absorption in the first quarter. Leasing activity for the second quarter totaled 1.6 msf, slower than usual, and some construction, manufacturing and retail companies have reported that equipment, raw materials and commodities costs were generally leveling off.
There are 18 new construction projects under way, totaling 3.8 msf, with the largest project being the 2.3 msf expansion at the Avon Lake Ford plant — meaning there are only 1.5 msf being built to suit.
What companies should consider a move despite current market conditions?
If a business is facing increasing rental rates, or its growth is limited by a lack of space for inventory, it might be a good time to make a move. But if you need more space, you’re going to have to pay, within reason.
And because there is limited space available, landlords have the upper hand, allowing them to increase rental rates throughout the market.
If a business has cash on hand and isn’t concerned about the cost of borrowing money, it is in a much better position to make any necessary moves. If you need a property now, if you are bursting at the seams and need space and you’re willing to pay, or are a cash buyer, those businesses can still be making moves in a difficult market.
It’s not a terrible idea to wait. Prices can be high, money is expensive, and those two things don’t go great together. In addition, with less money available, employers are stretching employees and making do with what they have. Employment levels are flat, as many firms focus on hiring only critical staff. As a result, wage and nonlabor costs have increased moderately.
How can an outside expert help businesses negotiate an uncertain market?
It is vitally important to have an outside representative on your side. Owners are focused on their business, not on the intricacies of real estate, and an experienced broker can help ensure you are getting the most for your money in making a move.
Whether you are a landlord leasing out space, or a tenant looking to renegotiate your current lease, or buy or lease space to make a move, an experienced broker can pay huge dividends. Experts a have an in-depth understanding of the market. They can look at comparable leases, help ensure tenants aren’t paying out-of-market rates and help landlords find quality tenants and get market rate leases in place.
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